Wrecking the Public Sector

Reprinted from The Common Good, No 30, Spring 2004
Compiled by Kathleen Gallagher

It’s all going to come crashing down. According to a new study by Standard and Poor’s, the public sector is in trouble almost everywhere. Throughout the world, everywhere public services are being systematically opened to competition and privatised. In New Zealand, Australia, North America and Europe, countless post offices and railway stations have been closed. European politicians have even claimed that imagining horror stories is the right method to sell painful reforms. French Minister Phillipe Douste-Blazy seems to have caught on to this ‘right method’. Introducing his health insurance plan on French television in May he said, ‘With a deficit of €23,000 per second, we won’t make it. We are bankrupt. If we do nothing, then state healthcare is finished.’

But of course they do something. The Institut Montaigne, a think tank chaired by Claude BeBear who also happens to chair the board of one of the world’s largest private insurance companies Axa, already has a few ideas. One is called shared health cover. In an attempt to ‘encourage patient responsibility and keep a check, if necessary on expenditure’, the scheme proposes to exclude ‘certain kinds of traffic accident and sporting activity that should be covered by individual insurance policies’. It also features an ‘annual excess charge per family, to be waived if appropriate prevention procedures are adhered to.’

The institute’s idea is to ape the United States system. Yet the reality in the US the health care heaven of BeBear’s dreams, is one of ever-diminishing cover and ever-higher bills for patients.

The very principle of free access to health care and education is under threat. The public sector has fragmented into a mass of competing agencies whose employees fear for their jobs.

The process always starts with an assertion that the centralised system does not work, it is bureaucratic, bankrupt, inequitable. It must be broken up and decentralised for the sake of devolution, and budgetary responsibility must be handed over to ‘authorities’ – in New Zealand’s case, the Treasury. A market must be created in order to manage the service according to agreed pricing structures. This health or education or communications market will reveal which hospitals or schools or post offices are viable and which are not, so that ‘appropriate’ closures can take place.

In New Zealand the erosion of the public sector began with the State Sector Act of 1988 and the Public Finance Act of 1989. The NZ public voted out Roger Douglas and Ruth Richardson who followed on his heels, and the extreme privatisation agenda they represented. However, Roger Douglas and Ruth Richardson and their supporters managed to introduce and then fix in place, legislation which continued their agenda, despite the fact that they were no longer holding office. This legislation has never been amended nor repealed.

George Savas, one of the key architects of extreme privatisation proposes that you set in place structures, processes and rules to facilitate this type of privatisation – ‘limiting devices such as spending caps, budget cuts, revenue limitations and balanced budgets all facilitate this process’. In the 1991 budget, rules were devised and applied to determine the upper limit on the amount of expenditure available for each department. These rules achieved large expenditure reductions and the following year these upper limits were locked in as baselines then rolled forward for two years, thus ensuring a continuation of those expenditure reductions. Further expenditure reductions were achieved by removing a percentage from the baselines each year. ‘Efficiency dividend extractions’ continued until 1994 by which time they were no longer politically sustainable, but the rolling budget baseline extended them through to 1996. Since then, budget baselines have been held at fixed and nominal levels with the intention that inflation will cause gradual erosion. The eroding effect of the baseline regime is intended to force all departments eventually to seek additional resources at which time their budgets will be closely scrutinised, and additional privatising initiatives then introduced.

The Public Finance Act requires payment to the Crown of a department’s reported surplus but is silent on operating deficits. The Treasury’s interpretation of this is that a reported surplus belongs to the Crown and a reported operating deficit must be borne by the department. This has a resource eroding effect. Treasury in 1997 re-interpreted operating surplus requiring that operating results be analysed into smaller separate components, each of which be considered separately – surplus or deficit. This accelerates the resource eroding effect of the Public Finance Act.

In 1999 the Auditor-General stated that departmental resource erosion seemed to escape parliamentary scrutiny. Many of the resource eroding processes outlined occur outside parliamentary scrutiny and outside the reach of the Auditor-General’s controller function. They occur within Treasury’s discretion. With the adoption of accrual accounting and increased requirements for every department (44 departments in 1996), the volume and complexity of financial information has increased while parliamentary scrutiny time has been reduced. In 1992 time for the estimates was reduced from 13 days to 20 hours, but by 1999 it had been reduced to 8 hours. At the same time Treasury’s discretion and control had increased.

The key processes which have caused erosion in government departments since 1989, are the budgeting process, commercialisation of outputs, the developing of contracting arrangements and the repayment of surplus requirements. Invisible technical instruments have been used to remove privatisation decisions from Minister’s hands and to embed privatisation biases in the system. Resource erosion forces departments to bid for additional resources. According to Savas, a financial crisis in a department makes privatising decisions easier to impose. The NZ public has voted firmly against privatisation, so proponents of privatisation disguise their actual intent by using rhetoric such as ‘efficiency’, ‘innovation’ or ‘modernisation’, likely to be acceptable.

In the UK higher education is the latest public service to have been sent down the ‘corridor of reform’ for want of public funding. Spending per student in the UK fell from $14,500 in 1990 to $9,000 in 2000. Tony Blair prefers to get students to pay, tripling tuition fees to more than $5,400 per year

Under the same sort of pressure, NZ’s once intact public health system, is slowly imploding. As Ian Powell, Executive Director of the Association of Salaried Medical Specialists, says: ‘Funding constrains are forcing many District Health Boards (DHBs) to deny patients access to health services that they badly need. The most recent example is the rationing of surgery. Lack of funding is directly responsible for this situation. Different parts of the health system are increasingly blaming other parts of the system for the growing number of cracks in the system. Blame and risk shifting is becoming part of the internal culture of DHBs. Capping it all off is a rapidly deteriorating industrial relations environment in DHBs. DHBs appear to be like an out-of-control train heading in slow motion towards a major disaster.’

It may be that some members of the present government are aware of the nature of the system and are themselves pursuing an undisclosed privatisation strategy. Alternatively, it may be that the government is being misled by a group within Treasury. The Labour Coalition Government was elected in 1999 with a stated objective ‘to maintain and strengthen the state sector’. While these technical instruments remain in place, regardless of the stated policy of any government in office, this system will continue to favour privatisation. Until the legislation which ‘reformed’ NZ’s core public sector – The State Sector Act (1988) and the Public Finance Act (1989) has been reviewed and amended, resource erosion in our government departments will continue and the extreme privatisation strategy will continue unabated.

To read our corporate media propaganda, one would think extreme privatisation was universally acknowledged as a good thing. Yet privatisations have rarely been sanctioned by popular vote. Only four percent of New Zealanders supported the sale of state-owned forests, with 79% actively opposed to the plan. All of the big state sell-offs in Britain were greeted with outright hostility by the people. Yet Britain has gone ahead and privatised its industries and public services.

As I write this, a new Public Finance (State Sector Management) Bill is due before the House for its second reading. This new Bill accelerates the privatisation agenda still further. It’s an attempt to wipe out the ‘burdensome restrictions’ to the business of foreign banks and financiers. Under this Bill, the NZ Parliament could be involved in a debt they have not even agreed to and the NZ public would have to repay it. The Bill promotes the use of Enron-style off-balance sheet financing arrangements by Treasury and at the same time removes the Auditor-General’s controller function with regard to Treasury. In the late 1990s most of the Canadian Treasury were sacked for trying to introduce a similar piece of legislation. This piece of legislation is extremely dangerous to our relatively incorrupt and democratic form of government. It takes no account of the vulnerability of a small economy like NZ, to serious errors, mistakes and international fraud.

None of these pieces of legislation take into account what the public of NZ has voted for – ‘to maintain and strengthen the public sector’. Only yesterday we had our own national post office, electricity board, education authority and health service. These were not merely production units with a mission to make more money than their competitors. They were there to deliver the mail, provide electricity and ensure the population was educated and healthy. They sought to ensure the common good and not line the pockets of the already rich.

(This article is prepared from Sue Newberry’s paper ‘Intended or Unintended Consequences: Resource Erosion in NZ’s Government Departments’ first published in Financial Accountability & Management 18 Nov 2002, and from Serge Halimi’s article ‘Road Map For Privatisation: The Great Leap Backwards’ first published in le Monde Diplomatique.)

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